How to Build Credit: Showing Your Credit Some TLC

This is the first blog in our Credit series.

When applying for credit - whether it be a loan or credit card - many lenders review your credit report to help determine your eligibility. For example, a good credit score is key when buying a home. But did you know potential employers may request credit checks on applicants in most industries - provided they have written authorization in compliance with the Fair Credit Reporting Act (FCRA)? Discover® reports this is to check potential borrowers’ traits such as organization, trustworthiness, or financial irresponsibility.[1]

Keep in mind if a potential employer decides not to hire you because of something in your credit report, they must provide you a copy of the report and a “Summary of Rights”, according to the Federal Trade Commission. [2]

It’s possible you already know that because according to the 2019 Experian Consumer Credit Review, 72% of consumers said their credit score is important to them.[3] The fact that you’re here tells me you are likely a part of this 72%. But, maybe your credit score isn’t where you want it to be. The good news is that, with a little TLC, your credit score can improve.

What is a good credit score?

Before we dive into ways to build your credit, let’s first define good credit. Credit scores range from 300 to 850, and they indicate how likely you are to repay and manage debt. Credit scores take into account payment history, types of credit, credit longevity, credit inquiries and activity, debt utilization (actual debt compared to credit limit), and amounts owed.

Credit score ranges vary based on the credit scoring model used (FICO® or VantageScore®) Credit scores may also vary based on credit bureaus (Experian, Equifax and TransUnion) that pull the score.

FICO® score:

• Very poor: 300-579
• Fair: 580-669
• Good: 670-739
• Very good: 740-799
• Exceptional: 800-850

VantageScore®

• Very poor: 300-499
• Poor: 500-600
• Fair: 601-660
• Good: 661-780
• Excellent: 781-850 [4]

Experian reported the 2019 U.S. average FICO® credit score was 703.[5] How do you stack up? Perhaps you want to set yourself a goal here. Now let’s talk about how you can work toward that goal…

1. Pay bills on time

Your payment track record is 35% of your credit score. Read that again – THIRTY-FIVE PERCENT! Why? Because lenders want to make sure you will pay them back.[6] Not to mention, in January 2020, FICO® announced the new FICO® Score 10 Suite. The new model will put an even greater importance on timely bill payment and ratio of debt to available credit. Here’s the long and short of it: It’s super important to pay your bills when they’re due.

Late or missed payments will not only send your account to collections, and possibly stack up fees, but they could also seriously hurt your credit score. If inability to repay is messing with your credit potential here are a few tips that may help:

• Reoccurring payments: Set up automatic payments. Some companies will even offer a discount if you do this. If automatic payments aren’t your thing, try setting a calendar reminder that gives you plenty of time to make sure you have the money in your account and can get the payment made by the due date.
• Change due dates: Sometimes due dates just don’t work with real life. Example, a few years ago I bought a car. Because of the timing, my car payments were scheduled to come out of the same paycheck as my rent. Eek! My lender allowed me to change ALL of my due dates once I made the initial payment. All it took was one call. So give your creditor a call and see if they will work with you to better align your bills with your cash flow.
• Hiccups happen: If your late payment was an accident or due to COVID-19, call your creditor to discuss options and you could possibly have the blemish removed.

2. Pay down some debt

According to FICO®, Amounts Owed on accounts determines 30% of the score.[7] Wow! If you’re looking for a quick win to increase your credit score, slaying debit could be the answer my friend. The following shows the key factors that make up the Amounts Owed section of your score:

• All accounts count: The owed amounts of all your accounts are assessed. And if you do pay your cards off each month this doesn’t guarantee your credit report will show a zero balance. Usually your credit report will show the complete balance of your last statement.
• Varied accounts: What you owe on different types of accounts matters. FICO® scores looks at the amount due on separate accounts such as installment loans versus credit cards to assess your score.
• High amounts owed, high risk: When several accounts have amounts owed it may foreshadow that the borrower is a higher lending risk and possibly financially overstrained.
• Credit utilization ratio: The available credit percentage on your revolving accounts matters big! When a large amount of your available credit is used, it can show poorly on your score. No maxing out credit cards! Using a lower percentage of available credit shows more positively on your score. This is called, low credit utilization ratio.
• Amount owed vs. original amount borrowed: Another aspect researched for your score is an original loan amount compared to how much you’ve paid on the loan. FICO® suggests that paying down your installment loans show your ability and willingness to repay your debts.

3. Use a co-signer

Build your credit reputation by finding a trustworthy co-signer. Typically this is a parent, responsible friend or close relative with a solid credit score. CreditCards.com reports one in six U.S. adults co-signed for a credit card or loan.[8] But not just anyone can be a co-signer. They need to meet specific criteria, such as:

• Typical credit score: 670 or higher.[9]
• Reliable income: Ensure repayment of the loan in case of default.
• Low debt-to-income ratio: Low total monthly debt payments compared to earnings/income.

A co-signer with a strong credit history could shine a positive light on your credit in several ways. And when you’re just starting out or need a credit hand-up, the following are attractive perks:

• Their good credit is yours: A co-signer’s positive credit score and responsible history reflects well on you.
• Lower interest: Rates and fees will likely be less due to better credit profile.
• Higher loan amounts: You may be eligible for more loan funds because you’re less of a risk.
• Opens credit doors: More lenders may be willing to offer loan options.
• Dual responsibility: Take great care of this financial opportunity. If you or your co-signer mismanage the loan it could ruin credit scores for both of you.

4. Become an authorized user

Being an authorized user has some similarities to having a co-signer since you’re piggybacking off of another person’s established good credit. Essentially, a fee is paid to add the authorized user to “rent” the established account history.[10] Ensure you and the primary card owner understand responsible usage and repayment of the credit is paramount. If one of you racks up debt and poor payment habits, it will affect both of your credit scores. Look for a card owner who can offer:

• Trustworthiness: Choose a dependable person with strong credit.
• Benefits: Receive the perks of credit without a brand new account.
• Card use: You never have to actually use the credit card.
• Credit reporting: Make sure credit activity is reported to the credit bureaus.

5. Open a bank account

Open a free checking or savings account to build a good relationship and financial history. Keep your account in good standing so the bank sees positive activity. This may show a foundation of responsible banking and aid in credit offers. Although bank accounts do not show on a credit report, lenders may use your history to decide if you have the ability to take on debt.[11] Here’s how you could build that strong relationship with your bank:

• Positive activity: Keep up with regular deposits to grow your account.
• Dependability: Set up direct deposits and auto-payments to lessen likelihood of account hiccups.
• Be accountable: Responsibly pay bills on time for a glowing payment history.
• Be cautious: Do not overdraw! This not only could cause fees and a negative account legacy, but may land you in collections.

6. Apply for a secured credit card

A secured credit card is designed to help build your credit score. Initially, you’ll need to provide a cash security deposit in an account. Your credit limit will be based on this deposited amount. Your credit line is a percentage of the secured deposit which is usually 50-100%.[12] Make sure the lender is actually reporting your positive activity to credit agencies, otherwise this will not help establish credit. Once your credit score is on the rise, you may choose to apply for an unsecured (not already backed by your funds) credit card. These thoughtful actions can help:

• Limits: Do not max out your card.
• Purchase sensibly: Buy only what you need.
• Repay: Make on-time payments every month.

7. Apply for a store credit card

We’ve all heard the offers: “I can save you an additional 25% with a [brand] card.” Store credit cards are easy to apply for in-store, usually easier to qualify for[13], and could help you build credit. But proceed with caution … they normally have higher APRs (annual percentage rates) and lower credit limits compared to other unsecured major credit cards. And applying for multiple store cards could have a negative impact on your credit by decreasing your score and making your financial status look unstable. Here’s how a card could impact your credit:

• Be responsible: Applying for credit cards will result in hard inquiries on your credit report. These inquiries temporarily lower your credit score. So do not apply for several cards at once because your score could take a big hit.[14]
• Good practices: Exercise responsible usage and repayment to keep your credit utilization ratio low. Store cards generally have a lower credit limit than major credit cards, so if you carry a high debit balance on a lower credit limit it could reflect negatively on your credit history.
• Credit history: Even if you do not carry a balance, keep the card open to establish a long credit history.
• Boost credit: Verify if your card history will be reported to credit agencies. Remember, this can be a great boost to your credit if you are responsibly using your credit. In turn, if the card is used negatively, it could hurt your credit.

Pro tip: Bigger companies often own multiple retailers. So if you’re going to apply for a store credit card, do some research to see all the places you can use the card. For example, Gap Inc. owns Athleta, Banana Republic, Gap and Old Navy – so you can get the same card perks at each retailer without having to get a store card at all their stores.[15]

Remember to stay committed

Good credit doesn’t happen overnight, but it can happen over time by making changes where you can. Start building a stronger financial foundation by paying your bills on time, linking up with a co-signer, becoming an authorized user, opening a bank account, or applying for secured or store credit cards - responsibly. With smart monetary planning and execution, you could build the strong credit foundation you want.